Global financial markets were roiled Tuesday by concern about the limits of central-bank easy-money policies. Stocks, bonds and currencies from the Philippines to Spain to the U.S. came under pressure.
U.S. Treasurys fell, pushing the yield on the 10-year note to a 14-month high of 2.27%, while a selloff in government-bond markets across Europe led to higher yields from Greece to Germany.
The Dow Jones Industrial Average lost 150 points after opening to trade at 15088.6. The Standard & Poor's 500-stock index lost 19 points to 1623. Stocks saw steeper declines in Asia, with shares off 4.6% in the Philippines—the biggest drop since September 2011—and 3.1% in Indonesia.
European and Japanese stocks also traded lower. The benchmark Nikkei Stock Average dropped 1.5% to close at 13317.62.
The latest bout of selling was triggered by the Bank of Japan's decision overnight to leave monetary policy unchanged, thwarting expectations that the central bank might announce a new policy designed to calm the Japanese government bond market. The BOJ's decision follows similar inaction by the European Central Bank last week to support the euro zone's still struggling economy.
Expectations are mounting that the U.S. Federal Reserve will begin winding down its bond-buying program, which has been pumping $85 billion in liquidity into financial markets each month. Many of the markets selling off Tuesday have been sliding since Friday, when U.S. monthly jobs data came in better than expected, potentially giving the Fed more room to taper its stimulus.
"This is a market that's become a little bit spoiled, and when things get a little hairy and markets correct, they expect something from the central banks, and they didn't get it," said Brad Bechtel, managing director at Faros Trading in Stamford, Conn.
The yield on Greece's 10-year benchmark government bond rose 0.90 percentage point to 10.35% Tuesday, hitting its highest level since early May, according to Tradeweb. The yield on the corresponding Portuguese government bond surged 0.34 percentage point to 6.52%, a two-month peak. Italian and Spanish bond yields also rose. Haven German Bund yields climbed, albeit more modestly than their lower-rated euro-zone peers. Prices move in the opposite direction as yields.
Mortgage-backed securities dropped more than Treasurys as rising yields increase the average life of the debt and boost chances for bigger losses as interest rates climb. Fannie Mae FNMA +4.19% 3% MBS for June delivery dropped 13/32 to 99-19/32, lagging the move in Treasurys by 6/32, according to Credit Suisse CSGN.VX -1.73% .
Currencies from emerging-market countries saw dramatic declines, prompting central banks in India and Turkey to step into the market to stabilize their exchange rates. The Indian rupee traded at a record low as the dollar strengthened to 59 rupees before the Reserve Bank of India intervened, while the South African rand and Brazilian real hit four-year lows against the dollar. The Australian dollar, another high-yielding currency that has fallen sharply in recent weeks, dropped as low at US$0.9325, its weakest level since September 2010.
"The recent uptick in volatility across financial markets looks increasingly as if it might be to do with a growing loss of confidence in Western central bankers' great monetary policy experiment," said Jeremy Batstone-Carr at Charles Stanley.
With no major economic indicators scheduled for release in the U.S. Tuesday, markets remained focused on next week's Fed meeting. Investors will be looking to Fed Chairman Ben Bernanke's comments for clues on when the U.S. central bank will follow through with a wind-down of its bond-buying program.
